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The following is a composite of several questions that have recently been submitted to Ask TheStreet.
I'm 18 and I made about $1,000 last year. My parents would like to open an IRA for me, but I want to invest in individual stocks. What options are available for this small amount? How and where do I start investing? How little can I start with?
So you're young and have a wad of cash burning a hole in your pocket. Time to start investing? Definitely. The younger you are when you begin your investment education, the better your chances are of gaining the understanding to find success in the market. But with all of the options available to investors today, that first step just might be the biggest.
Know Your Purpose
When contemplating your start in investing, one of the first things you'll want to decide is your purpose for investing. In other words, what do you hope to accomplish by putting your money in the stock market? As a young investor, it's easy to get caught up with grand ideas of making triple-digit returns -- when your first priority might not be to just make money. Setting out with goals that go beyond "Profits, profits, profits!" might sound like blasphemy to much of the investing world, but for someone who is just starting out, investing to learn might prove to be a lot more valuable down the road. That doesn't mean that making money shouldn't be a priority for you, it just means that it shouldn't necessarily be your first priority. By using your
portfolio as a means of understanding more about the way your decisions affect your investments, you'll be a much more competent investor in no time.
Invest, Learn, Repeat
Using your portfolio as an educational tool is one of the best ways to determine which repeatable actions and practices on your part can result in gains to your portfolio. One of the best ways to achieve this is by keeping a record of all of your investment-related decisions and transactions -- either on paper or on your computer -- then referring back to it and analyzing which of the decisions were good and which were bad. By keeping a record, you'll be able to see how the choices you make affect your portfolio, in both the short and long run. Focusing on understanding the effects of different financial decisions will enable you to concentrate mainly on those moves that seem to be beneficial, while avoiding making the same mistakes more than once.
That's not to say that making money shouldn't be a priority for a young investor. It just means that you should stick to making repeatable decisions that have measurable consequences as much as possible.
There are myriad investing strategies out there, and the same attention to detail should be kept in choosing your own. For a young investor, experimentation is the name of the game. Since you're just entering the world of finances, you can afford to spend the time to determine what works best for your portfolio without risking the money or
opportunity cost that an "older" investor might be risking. Investing a little bit of time and effort into using your portfolio as an educational tool can mean a big payout for the rest of your financial life.
How Much Is Enough?
With so much money trading hands every day in the financial markets, it's easy to question whether you have enough money to accomplish anything in the stock market. This question basically consists of two parts:
: Will I be able to open an account with the amount of money I have?
: Can I actually make any money with what I have?
. Minimum portfolio balance is a regulatory restriction that can vary from
broker to broker. Minimum balances typically exist as a way for brokers (or banks for that matter) to ensure that the
accounts they hold are worth their while (i.e., they generate enough revenue to cover the expenses the
financial institution incurs to keep the account active). Since banks and brokers lend out the money that you give them, the profitability of keeping your account open is directly related to how much cash you have in your account.
While the minimum balances for some full-service brokers can be more than the average American household makes in a year, online brokers typically have minimum balances of under $3,000. Brokers exist for almost every financial situation. There are even brokers, like Sharebuilder, with no minimum balance. Remember, though, that minimum balance shouldn't be too high up on your priority list for choosing a broker. Suffice it to say that if you're interested in starting an investment account and have $1,000 or as little as $100, you
actually have a successful portfolio.
This brings us to the second part of deciding how much money is enough: practicality.
. As an example, let's use a $100
portfolio. If you had just $100 to invest, the number of companies you could buy positions in would be pretty limited -- not because you couldn't afford them, but because your ability to draw a profit would be diminished with each position (i.e., holding of any particular stock you bought).
Remember, you're not making money until you recoup the trade execution costs you paid to buy the stock and will pay again to sell it. Having lots of positions means that each position is smaller, and therefore needs to perform better just to cover the costs of trading. As a young investor who doesn't have a lot to invest, you should always think about the practical concern of sizing up your positions so that you can actually make money.
Where to Put Your Money
Now that you know your investing purpose and limitations, it's time to think about what types of investments to consider.
Typically, young investors open traditional
brokerage accounts. With a traditional brokerage account, you'll have the greatest portfolio flexibility with the fewest restrictions. While investing in deferred tax retirement accounts like an
IRA can provide notable advantages or disadvantages based on your tax situation, they also come with extra investing restrictions, complications, and fees (depending on your IRA). Sticking with a run-of-the-mill brokerage account will save you a lot of complications that can wait until you better understand investing or have a need for the features of a retirement account.
The same is true of "
margin." While the idea of opening a margin account may sound enticing (it's what the big guys on Wall Street use), "buying on margin" brings higher balances and much higher risk into the picture for a novice investor. Staying away from
margin accounts until you have some investing experience (and money) is usually a pretty good idea.
Typically, when you're a young investor, it's best to keep your investments simple. Investing in individual stocks can run you through the full experience of investing in securities without getting you in over your head.
Index funds and
mutual funds (including
ETFs) provide your portfolio with instant
diversification, which is great if you're investing solely for
growth. Just sitting back and letting the fund managers (see
money manager or
managed account) invest your money for you might get you better returns, but they will be at the expense of your education and know-how as an investor. Ultimately, once again, it comes down to your own investing goals. In other words, there's nothing wrong with investing in a mutual fund as long as you realize that it's the fund manager who is bringing in those returns for you.
Managing your own portfolio is one of the best ways to learn the ins and outs of the market as a young investor. And, investing diligently in stocks that support your goals is a fantastic way to make money at the same time. By analyzing not only your investments, but also the decisions that led you to them, you can create a financial future worth looking forward to.
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.